REX American Resources Corporation (NYSE:REX) Q3 2022 Earnings Call Transcript

REX American Resources Corporation (NYSE:REX) Q3 2022 Earnings Call Transcript December 1, 2022

REX American Resources Corporation beats earnings expectations. Reported EPS is $0.18, expectations were $0.12.

Operator: Greetings and welcome to the REX American Resources Fiscal 2022 Third Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. I would now like to turn the conference over to Mr. Doug Bruggeman, Chief Financial Officer. Please go ahead.

Douglas Bruggeman: Good morning and thank you for joining REX American Resources fiscal 2022 third quarter conference call. We’ll get to our presentation and comments momentarily as well as your question-and-answer session. But first, I’ll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today’s conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company’s current expectations and beliefs but are not guarantees of future performance. As such actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today’s news announcement and the company’s filings with the Securities and Exchange Commission including the company’s reports on Form 10-K and 10-Q.

REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I have joining me on the call today, Stuart Rose, Executive Chairman of the Board, and Zafar Rizvi Chief Executive Officer. I’ll review our financial performance and then turn the call over to Stuart for his comments. Sales for the third quarter increased by 8.5% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 66.3 million gallons this year versus 69 million gallons last year. We reported a gross profit of $11.3 million this year versus a gross profit of $25.2 million in the prior year. For the current year quarter improved selling prices were offset by higher corn and natural gas pricing.

Ethanol pricing improved by 8%, dried distiller grain and corn oil pricing both improved by 25% for this year’s quarter over the prior year third quarter. Corn cost increased by 17% and natural gas pricing increased by 56% for this year — this quarter, compared to the prior year as inflationary pressures and the impact on commodity pricing from Ukraine, Russia conflict continued. Corn pricing was also impacted by higher corn basis based upon reduced availability of corn as we approach the harvest season. Gross profit comparison between years benefited slightly from fewer ethanol contracts sold net of freight in the current year, which leads to higher sales. SG&A increased for the third quarter to $7.9 million from $6.3 million in the prior year.

The increase is primarily due to an increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year, which we classify as SG&A cost. We had income of $661,000 from our unconsolidated equity investment in this year’s third quarter versus an income of $349,000 in the prior year. The company’s interest and other income in the current year increased dramatically to $2 million versus $35,000 the previous year, primarily reflecting increased yields in our cash. The discontinued operations reflected in the prior year’s numbers are from the refined coal business as we ended those operations on November 18 of 2021, there was no impact in the current year. We reported a tax provision from continuing operations of $1.2 million for this year versus the provision of $4.3 million in the prior year, primarily reflecting the lower level of income in the current year.

These factors led to net income attributable to REX shareholders from continuing operations of $3.2 million for this year’s third quarter versus $13.3 million in the prior year. Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.18 for this year’s third quarter versus $0.85 in the prior year. I would again like to point out all outstanding shares for all periods have been retroactively adjusted to reflect the three for one stock split, which was effective on August 5, 2022. Stuart. I’ll now turn the call over to you.

Stuart Rose: Thank you, Doug. Going forward, currently — in the current quarter, we remain profitable, but crush spreads are still challenging, which our CEO Zafar Rizvi will discuss in his segment. We’ve made significant progress in carbon capture, which again will be discussed by Zafar Rizvi in his segment. In terms of our cash, we have approximately $290 million in cash, very little or no debt. We continue to look for investments in ethanol companies although nothing is imminent. We’re also making major investments in carbon capture, which will be discussed later in the call. We also now can earn meaningful interest on our cash and with $290 million we expect our interest income to go up during the current quarter and during the following quarters.

We buy back stock on dips. We bought back approximately 250,000 shares in the quarter. We have Board authorization for another 875,000 shares. Zafar Rizvi will now discuss our ethanol and carbon capture operations. Thanks.

Zafar Rizvi: Thanks, Stuart. Good morning, everyone. As I mentioned in our previous quarterly calls, challenging logistic problems caused by issues with the railroad and availability of corn were slowdown in our production. The availability of corn in the South Dakota due to a drought last year and again this year resulted in a decrease in corn yield, which led to an increase in the price of corn greater than the ethanol price. On top of that, the high price of natural gas is also negatively affecting the profit margin in the ethanol industry, as Doug mentioned earlier. The USDA November corn report shows the corn yield dropped 26% in Nebraska and 10% in South Dakota. Nebraska about 2.9 million bushels were dropped and in South Dakota, 78 million bushels were dropped compared to last year.

In the South Dakota, where our Nugen plant is located, and while it — but — it increased 13% in Illinois, where our One Earth Energy plant is located. Sorry for that. The USDA also reported corn production increase in Illinois, North Dakota and Minneapolis and production drop in all other corn producing states. The worst affected states are nearly all western states, Nebraska, Kansas, South Dakota, and Texas. The November USDA reports show an expected output of 13.91 billion bushels for 2022, 2023 crop year compared to approximately 15 billion bushels in the €˜21, €˜22 crop year, a decrease of 8%. On the bright side, ethanol and DDG export have increased compared to last year through September 2022 and the non-food corn oil price continues to increase and it is expected to increase even more.

Ethanol exports of 2022 total 1.12 billion gallons, compared to 873 million gallons for the same period last year, a 27% increase. Despite all these issues and difficulties, as long as we continue to source corn at a reasonable price and railroad efficiency and logistic improves at this very early stage, as Stuart mentioned, we expect that the fourth quarter could be profitable. Let me now share the progress of our carbon sequestration project. These are the bullet points. The first test well at One Earth Energy was successfully drilled in total depth of around 7,100 feet. The 3Ds seismic testing and water movement tests are completed and we are very pleased with the results. Several other tests and modeling work were performed to verify the maximum injection pressure, reservoir quality, rock core analysis, expected movement of the CO2 bloom.

The test results show the location is a very good target for carbon sequestration. The design of the compression facility is complete. The contract to build the compression part of the facility has been signed and long lead time equipment has been ordered. The pipeline to injection well operator identification number have been received. The work on pipeline FEED study is expected to be finished by January 2023. The Class 6 permit for three injection well with a capacity to store 90 million tonnes of carbon has been completed and submitted. We continue to complete several other documents required by different government agencies, but most documents that require a lead time are completed or expected to be completed very soon. Once again, this is a highly technical and time consuming project.

It required considerable time to make progress, but we are pleased that we have started — but we started four years ago now has achieved some big milestone. As I also mentioned in our previous call, we are also evaluating several other projects that would increase production efficiency and energy saving as well as reduce water consumption at our plants. We believe the completion of some of these projects will lead to a greater benefit under the Inflation Reduction Act passed by Congress. The Section 45Q cash payment for the carbon sequestration increased to $85 per metric ton from $50 per metric ton. The clean fuel production 45G, which has led to a reduced carbon intensity score would provide a much better return than 45Q. In summary, we are very pleased to announce once again a profitable quarter in a very, very difficult environment as well as very good progress with our carbon sequestration projects.

Hitting these carbon sequestration milestones and achieving a ninth consecutive quarter of positive income cannot be accomplished without the hard work and dedication of our colleagues. We are very appreciative of their efforts on achieving these positive result. I will give back the floor to Stuart Rose for additional comments.

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Stuart Rose: Thank you, Zafar. In conclusion, the ethanol business remains steady and carbon capture business. It’s been helped significantly by government legislation along with great progress by Zafar Rizvi and his team. We continue to consider — we continue to believe that we have the best plants among the best plants in the industry, our locations are good, especially the one that is right in the middle of what we consider the best carbon capture area of the country. But more importantly, we truly believe it’s a we have among the best employees in the industry. Most companies in the industry were not — many, many companies were not profitable. We had a profitable quarter and we continue to consider our employees to be among the — we consider that the real reason why we’re doing better than most is we consider our employees to be the best and that I think separates us in ethanol and I think, you’ll see and we hope that it will continue and will separate us in carbon capture.

I’ll now leave the podium open to questions.

Q&A Session

Operator: Thank you. Our first question comes from Jordan Levy with Truist Securities. Please proceed.

Jordan Levy: Good morning all and really nice execution again this quarter. Maybe I’ll start out, you’re clearly making good progress on the CCS side. If I think about that project moving forward along with the clean fuel credit and the IRA that starts I think in 2025, maybe — could you just help us think about how those two items might play together as we get into some of the out years, assuming CCS progresses and what that means for the business?

Stuart Rose: Zafar?

Zafar Rizvi: Yes. Jordan, the 45Z and 45Q. 45Q is a direct payment up to $85 per ton and 45Z is a tax credit, which you receive if you reduce the carbon intensity, which is the line right now if most ethanol plants had approximately 70 CI score what we call it carbon intensity plant. And then there is a line, which is a 50 if you reduce anything below the 50, you get some per gallon basis tax credit on each gallon you produce. So, there is a far more like to look at it carbon. We are not — just want to make sure, we are not tax experts, but this is what I understand. So, when you do the carbon sequestration, you reduce approximately 30 points to CI score. And then there is about 18 points is for the land use. That also reduced because we are — our land use what happened, we further reduced that 18 point.

So if you started 170 and then you reduced by almost 48 points and then you can reduce your further CI score. If you are able to achieve zero, which is not that easy, but there is also have to be made a lot of changes in the process and other things, which has to be accomplished. As I mentioned, we were working on a lot of these things previously for the last couple of years to reduce our CI score. So, we are already working on that thing we — for example, if we are able to achieve zero, but I’m not saying that we will be or we will not be, then it’s almost equal to a dollar a gallon of your ethanol production. So, if we are producing 150 million gallons and we reduced CI score to zero, we can have almost per gallon basis, a dollar a gallon that may be in one location, can be as much as $150 million.

But we are not expert, but that’s what we understand at this time.

Jordan Levy: And I’m certainly no tax expert either, but that’s a great explanation. Maybe just the clarify, did you — on the land use side of that, did you mentioned that you’re working on something to get that 18 point reduction or is that .

Zafar Rizvi: When we have accomplished the carbon sequestration, if we take the carbon all and put it in the ground, under that formula, we get approximately 30 point for the carbon sequestration we did and 18 point, which is now ethanol has been used. They use always that when they compare their our CI score, they always add 18 point for the land use. For that land use will be automatically will also get the reduction with carbon sequestration. So that’s where it adds up. That’s what I understand.

Jordan Levy: So you’re basically — you’re getting nearly a 50 point reduction just on the carbon capture.

Douglas Bruggeman: None of these numbers Zafar saying include what we potentially the higher selling price of zero carbon or low carbon ethanol, which, it’s another parts — we don’t want anyone to put that in our numbers, but that’s a real possibility also.

Zafar Rizvi: Exactly. As I’ve learned generally there is a 70 — normally 70 to 72 generally ethanol plants has CI score, which they call it. So if you take it 30 point reduction for the carbon sequestration and 18 point reduction for the land, that’s a 48. So, 70 minus 48. So, you can see that it’s going to come approximately 22. So the line started with the 50 that you have to have minimum 50 and then go down. So, that’s where the comparison is done. So, it is there a far more lot, which we understand that will be used.

Jordan Levy: Got it. That’s helpful. Next, there been some headlines on Rovio’s coming out in the next day or whatever. Just curious, your thoughts if we assume mandates for ethanol roughly held flat over the next three years or so?

Zafar Rizvi: I think, we are hearing it’s approximately still going to be staying at 15 billion for ethanol, which they may increase the overall 21 billion, but we understand that it’s probably going to stay at 15 billion for the ethanol, but we’re not sure up until it’s released.